FAQs about TPC’s Analysis of the Romney Tax Plan

By :: August 16th, 2012

Tax Policy Center’s analysis of Governor Romney’s tax plan has elicited much comment and misinterpretation. In a new paper, Sam Brown, Bill Gale, and Adam Looney clarify what the original paper did and did not say by addressing in a Q and A format some of the questions that have been raised.

The authors reemphasize their conclusion that Governor Romney’s tax plan cannot meet all of his stated criteria: lower rates, repeal of the AMT and the estate tax, maintaining preferences for saving and investment, not raising taxes on the middle class, and revenue neutrality.

The authors also find that the basic conclusions are unchanged if two preferences for saving and investment— the tax exclusion for municipal bond interest and the exclusion of inside-buildup on life insurance vehicles—are added to the list of base broadening provisions that might be used to pay for individual income tax rate cuts.

Check out the new paper to see the authors’ responses to questions about their analysis

12Comments

  1. Michael Bindner  ::  9:58 pm on August 16th, 2012:

    I still think it would be helpful to public debate to suggest correctives.

  2. Ralph H  ::  9:36 am on August 17th, 2012:

    As a member of the potential biggest loser group (100K to 500K) I see the problem. I would support ending tax exempt treatment of Munis. This is less of a savings issue than say lower ordinary dividends and capital gains rates are since those taking advantage are already very well off. By doing this the necessary change to middle class deductions (mortgage interest, taxes, charities, employer health care) could be minimized. Since Congress will vote, I would have to think most of these “sacred cows” will not be completely eliminated. In my own case, the statutory rate is irrelevant as my marginal tax is the 26% AMT rate, and I lose the deductability of marginal taxes while retaining mortgage deductability.

  3. Vivian Darkbloom  ::  10:49 am on August 17th, 2012:

    This is very disappointing. Late and quite incomplete. It leaves more questions open than answered. TPC now changes its assumptions and its numbers, but the initial shot will be the one that was heard around the world and used in political campaign attack ads.

    Among many other things, the TPC *still* has not explained how they allocated the distribution of eliminating the estate tax and why on earth they still insist that there would be a step up in basis if the estate tax is eliminated. In order for this result to apply, the Romney proposal would need to *change* current law, not merely *retain* the step up provision. It is already a feature of current law that if an estate is not subject to estate tax, there is no step-up.

    Bloomberg has an article that has picked up on this. They wrote:

    The updated study doesn’t include several other tax breaks that benefit high-income taxpayers. For example, the center assumed that Romney’s plan to repeal the estate tax would touch the so-called step-up in basis.

    Under that rule, heirs get to reset the tax basis of assets to the date of death and only have to pay taxes on gains above that amount. The estate-tax repeal that was in place for 2010, however, included carryover basis, in which heirs would have to pay taxes on any gains above what the decedents originally paid for the asset.

    Savings Break

    The researchers considered stepped-up basis to be a tax break for savings that Romney would keep off the table, based on campaign statements about reducing taxation on investment.

    “It requires putting a lot more things that are savings and investment on the table,” Looney said.
    The Joint Committee on Taxation estimates that the break for stepped-UNNp basis will cost the government $58.3 billion in 2015. The revenue gained from eliminating it would be significantly less, because that estimate is measured against the 55 percent estate tax rate in effect if Congress doesn’t act. ”

    http://finance.yahoo.com/news/romney-tax-math-gets-easier-080002971.html

    Of course, that last sentence is not true. The revenue “cost” from eliminating the step-up has nothing to do with the estate tax rate. The lost revenue would be based primarily on the capital gains tax rate—the rate that would apply if those assets would later be sold by heirs.

    Would the TPC please explain why they assumed there would be a step-up in basis under the Romney plan? Was this based on discussions with the Romney campaign? Why was this not addressed in the latest “update”?

  4. AMTbuff  ::  5:41 pm on August 17th, 2012:

    Among many other things, the TPC *still* has not explained how they allocated the distribution of eliminating the estate tax and why on earth they still insist that there would be a step up in basis if the estate tax is eliminated.

    Perhaps the TPC authors did not want to deal with the thorny question of how to allocate ending the estate tax while retaining a deferred tax liability through carryover basis. It’s a stretch to attribute to the decedent a tax that will be paid years or decades later. If you allocate both the deferred tax and the benefit of estate tax repeal to the beneficiary, you need a joint probability distribution for decedent and beneficiary income. If this was the reason for the authors’ assumptions, they should have said so.

    Unstated assumptions are worse than unexplained assumptions. Unexplained assumptions are worse than explained but incorrect assumptions. Explained but incorrect assumptions are worse than explained and correct assumptions. I agree that the estate tax assumptions were unstated, putting them in the worst category.

  5. Vivian Darkbloom  ::  6:23 pm on August 17th, 2012:

    “Perhaps the TPC authors did not want to deal with the thorny question of how to allocate ending the estate tax while retaining a deferred tax liability through carryover basis.”

    Not exactly. The TPC assumed two quite inconsistent things:

    1. That the estate tax would be eliminated (how the benefit of that is allocated is anyone’s guess); and

    2. Quite contrary to the above, that despite no estate tax, the heirs would get a step-up in basis (not a “carryover basis” as you infer). Obviously, they don’t explain how that is allocated, either.

    As I noted, assuming #2 would require an affirmative change to current law that provides that to get carryover basis the estate must be subject to estate tax. If the estate tax is eliminated per #1, existing rules would preclude a step-up.

    Assuming both of these simultaneously (quite aside from the allocation of the tax break) is completely preposterous and cannot be supported solely on the vague idea that tax expenditures supporting “savings and investment” would be retained.

    What on earth does the step-up rule have to do with savings and investment and if the estate tax is eliminated, the step-up has to be legislated, not “retained”.

  6. Vivian Darkbloom  ::  6:37 pm on August 17th, 2012:

    “assuming #2 would require an affirmative change to current law that provides that to get carryover basis the estate the estate must be subject to estate tax ”

    should read

    “assuming #2 would require an affirmative change to current law that provides to get a *step-up in basis* the estate must be subject to estate tax”.

  7. Steven C  ::  1:31 pm on August 21st, 2012:

    No matter what is explained, the sheer audacity of assuming that all factors remain static is the worst part of all these projections. What has worked in the past has always been that a reduction in tax rates has led to an increase in overall revenue collected by the government. As the revenue rose, tax policies changed and strangled the flow of money until the flow was choked again. What we need is for the government to eliminate their fat-cow programs and streamline their operations as much as possible (eliminate redundancy in agency overlap) and then lower taxes. If it means I lose any refund, I am for it anyway as long as I feel the government is running more efficiently. Right now, I want my money back because they are failing to show responsibility and judgment with what they do get.

  8. GregH  ::  8:50 am on August 30th, 2012:

    In what universe has cutting tax rates led to an increase in overall revenue? You are asserting things that aren’t just unsupported by fact but which are flatly wrong.

  9. Sam Brown, Bill Gale, and Adam Looney Are Late to the Feldstein WSJ Op-Ed Romney’s-Promises-Are-Mathematically-Impossible Party | FavStocks  ::  4:14 am on August 31st, 2012:

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  10. A. Caruso  ::  10:40 pm on September 13th, 2012:

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  11. Sergio  ::  4:50 pm on December 23rd, 2012:

    Can the American people be ask in a referendum to answer yes or not as in the majority of the democracies in the world?. Can we be call for Obama plan for a referendum and let the people decide directly bypassing the legislature?

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